A treasury bond with a time to maturity of 7 years and a coupon rate of 2.5% (paid annually) is trading at par.

(a) What is the YTM of the above treasury bond? Explain.

(b) Suppose you are also considering a 7-year bond of a firm in severe financial distress with a coupon rate of 2.5% (paid annually). Should this bond trade at a premium, at par, or at a discount? Should this bonds YTM be higher or lower than the YTM of the treasury bond above? Explain.